China's inflation came at 1.8%, US crude oil (WTI) gained over 4% yesterday
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Today is the most important day of the trading week, in terms of economic data release, as the US will reveal its latest CPI update, and it could be a make-or-break moment for the market sentiment.
Consumer price inflation in the US probably eased to 6.5%, from 7.1% printed a month earlier.
Beyond the headline figure, the core inflation should be closely watched, and should also ease enough to spur Fed doves. The core inflation fell to 6% at last release, from a peak of 6.6% printed for October, and is expected to fall to 5.7% at today's release.
The Federal Reserve (Fed) officials have insisted that they will also be focusing on specific categories, like services excluding housing, energy and food cost to have a sense of where consumer prices are headed, and what are the next policy steps.
Overall, a data set in line with the soft expectations, or ideally softer, should further boost the Fed doves, increase the bets of a 25bp hike in February, pull the treasury yields and the US dollar further down and give a further boost to equities.
If, however, the CPI print is higher than expected, and God Forbid, higher than last month, then we could see a sharp repricing in favour of a 50bp at the next FOMC meeting.
The market currently gives more than 77% chance for a 25bp hike in February.
In the markets
US equities extended gains yesterday, on hope that softening inflation will further boost the Fed doves. The S&P500 advanced 1.28%, as Nasdaq 100 jumped 1.76% and closed a touch above its 50-DMA. The US 2-year yield is waiting to find direction near its 100-DMA, while the 10-year yield is steady, slightly above the 3.50% level. The US dollar index is testing the 103 support.
Today's US inflation data will help move things, to one side or the other. But keep in mind that there is room for decent hawkish pricing given that the money markets still price that the US interest rates will top around 4.9%, while the Fed officials are struggling to convince investors that they will go above 5%.
One last thing about inflation...
Even if we welcome a soft, and encouraging CPI figure at today's release, I don't think that inflation will be on a smooth downward path this year.
The Chinese reopening, rebound in energy and commodity prices are the major risks to inflation.
Copper futures, a major barometer for economic growth, are up by nearly 13% since the start of the year, and more than 30% since the end-of-September dip, with a stronger case building for a further rally than the contrary – especially after the Chinese return from their New Year break.
US crude, on the other hand, rallied more than 4% yesterday, even though the EIA data showed that the US crude inventories jumped by more than 18 mio barrels, and gasoline inventories increased above 4 mio barrels last week.
Released early this morning, the Chinese inflation advanced to 1.8% as expected, but the contraction in producer prices has been slower than what analysts penciled in. With the reopening, the Chinese producer prices will also pick up momentum, and that may become a problem for price prospects for the rest of the world.
Trading dovish Fed expectations via bonds
Softening Fed expectations, combined to mild recession odds should give a more sustainable boost to bonds, before stocks this year – as potential recession will certainly erode corporate profits and cause further headache for stock investors. Therefore, bonds could be a better option than stocks for trading softer Fed expectations, as stocks will be subject to earnings risk in the coming weeks.
